Key points of investment

Service revenue growth rate leading the industry, improving profitability

In the first three quarters of 2024, the company's revenue was 392 billion yuan, up 2.9% year on year, and service revenue was up 3.8% year on year, leading the service revenue growth rate; net profit to mother was 29.3 billion yuan, up 8.1% year on year, after deducting non-return net profit of 28.7 billion yuan, up 5.4% year on year; EBITDA 111 billion yuan, up 5.1% year on year, the growth rate was better than 4.7% in the first half of the year. The company's net interest rate increased 0.37pp to 7.49% year over year, and the weighted average return on net assets increased 0.32pp to 6.48% year over year.

Stable and balanced development of basic and production business

Mobile Communications Services: Stable ARPU values. Revenue for the first three quarters was 156.8 billion yuan, up 3.2% year on year. The net increase of users was 14.9 million to 0.423 billion, and the net number of 5G package users increased 26.4 million to 0.345 billion, with a penetration rate of 81.6%; mobile ARPU was 45.6 yuan, the same as the previous year.

Fixed network and smart home services: Smart homes are growing rapidly. Revenue for the first three quarters was 95.6 billion yuan, up 2.9% year on year. Among them, smart household income increased 17.0% year on year, and smart home value contribution continued to increase. The net increase in cable broadband users was 6.1 million to 0.196 billion, and the comprehensive broadband ARPU was 47.8 yuan, the same as the previous year.

Industrial digitalization: Focus on high-quality development. Revenue for the first three quarters was 105.5 billion yuan, up 5.8% year on year, accounting for 29.1% of service revenue, up 0.6 pp year on year.

The company's overall business development is relatively balanced. In terms of mobile communication services, the number of new users added by the company is growing rapidly. Services such as satellite communication and quantum communication help create differentiated advantages. Communication assistants, video ringtones, personal cloud drives, etc. will drive the upgrading of application scenarios and promote the continuous increase in the value of mobile services. In terms of fixed network and smart home services, the company accelerates FTTR upgrades and gigabit application expansion, promotes ecological construction such as smart homes, smart communities, and digital villages, and promotes the steady development of the fixed network smart home business. In terms of industrial digitalization, the company is deeply involved in key industries to expand ecological cooperation, focusing on balanced qualitative development, and the momentum for increasing revenue from the production volume business is expected to continue to be strong.

Costs and expenses are effectively controlled

Costs and expenses were effectively controlled. Operating expenses (Hong Kong stock caliber) increased 2.3% year on year, accounting for 0.41 pp. Among them, depreciation and amortization increased 3.9% year on year, accounting ratio increased 0.22pp, network operation support cost increased 3.5% year on year, accounting ratio increased 0.23pp, SG&A decreased 0.5% year on year, accounting ratio decreased by 0.40 pp, labor cost increased 2.3% year on year, and revenue ratio decreased by 0.08pp. The year-on-year changes in sales expense ratio, management expense ratio, financial expense ratio, and R&D expense ratio were -0.63pp, -0.24pp, -0.02pp, and +0.31pp.

Credit impairment accruals declined in Q3, and the annual cash flow is expected to improve in the first three quarters. The company's net operating cash flow was 97.4 billion yuan, -13.8% year over year (24H1 -11.2% year over year), calculated credit impairment losses 5.3 billion yuan, and the credit impairment accrual scale in a single Q3 was -1.9% YoY (Q1 and Q2 year-on-year growth rates were 98.7% and 8.1%, respectively). In the context of local government debt conversion and the central government's emphasis on corporate debt recovery, the company has strengthened accounts receivable management, and the risk of bad debts is manageable. The subsequent recovery situation is expected to improve, and cash flow is expected to improve throughout the year.

Profit forecasting and valuation

The company's revenue is expected to grow at 3.4%, 3.3%, and 3.3% in 2024-2026, and net profit growth rates of 8.0%, 7.6%, and 7.5%, corresponding to PE 18.0, 16.7, and 15.6 times, maintaining a “buy” rating.

Risk warning

The increase in user size and ARPU fell short of expectations; the development of emerging businesses fell short of expectations; market competition intensified; cost reduction and efficiency fell short of expectations; dividend payments fell short of expectations, etc.